I was hoping that someone here might be able to help answer a question that has been bothering me for a while.  My understanding of the MBS flow of money is as follows: homeowner -> mortgage originator (or servicer in aftermarket) -> FNM/FRE -> investors.  So who is taking the loss when the homeowners stop paying their mortgage for 7 months while waiting for a short sale approval or foreclosure (assuming no MI for simplicity)?  I am invested in the answer to this question because I am under contract to purchase a short sale in this very situation, and I am becoming increasingly convinced that the loan servicer (unnamed megabank) is purposefully dragging the process out as long as possible so that they can maximize their fees for servicing the mortgage while pretending to perform a workout (which is impossible b/c the seller is unemployed).  But someone has to be losing money here in the meantime … so who is it and why don’t they care that they’re getting fleeced?  Is it because FNM/FRE are guaranteeing the MBS payment shortfalls so the investors are still getting their returns anyway?  Or is it because the investors are all offloading their MBS purchases to the Fed/Treasury who obviously aren’t concerned with returns?  Thanks in advance for any insight.

The lenders are overwhelmed with the number of short sales/foreclosures.  They don't have the staff or processes to deal with the numbers.  I just heard of one where the buyers submitted their CASH offer in February and still haven't heard.  You have to be patient.  It's not uncommon to hear of months passing before a response is received. 

Thank you for your reply, Bryan.  I realize that banks had not properly staffed and prepared for this situation which is causing delays, but I think that is a symptom, not the cause of the problem.  That’s why I was trying to “follow the money” to find out which player is acting “irrationally.”  And with the way the MBS market works currently (as I understand it), I don’t see where the loan servicer has an incentive to try to quickly resolve a short sale, foreclose on the property, etc. since they don’t own the mortgage anymore … it’s all “somebody else’s money” unless they are also an investor on the loan they are managing.  In fact, successfully completing a short sale would be to the detriment of the servicer since they would no longer be needed when the sale is completed.

So the problem isn’t really with the banks … they’re just acting in their own self-interest.  It’s the next level up that is not functioning right … the actor that is supposed to be putting pressure on the servicer (to whom they are presumably paying a fee) to reduce defaults and restore cash flow, but obviously isn’t.  That should be the investors, right?  But the investors aren’t doing it because Freddie and Fannie are still making the coupon payments for them with their “implicit guarantee” … which is really just taxpayer money now.  So I’m left to conclude that the real people taking the loss from the banks’ “inefficiency” are actually you and me.  I am hoping that I am missing something here, though, so can someone tell me where I’ve gone wrong in my understanding?